Bulging fiscal deficits necessitate heavy borrowing

THE UNION Finance Minister, Jaswant Singh, has formulated his Budget proposals in such a manner that the implementation of the recommendations of the Vijay Kelkar Committee in the final reports does not have any upsetting effect on the calculations of direct tax payers. No serious bid has also been made to reduce expenditure on subsidies, defence services and other major heads. Interest charges have risen further to a new high level as the fiscal deficit for the next financial year will be at a new peak.

The NDA Government has obviously been keen to avoid unpopular levies or a cut in subsidies and the like. Even the proposed increase in selling prices for fertilizers was rolled back. While the changes in import and excise duties are based on the recommendations of the Kelkar Committee, it has been thought desirable to avoid drastic changes in the structure of direct taxes, as existing commitments are being respected while the approaching elections to the State Assemblies and the Lok Sabha also have been borne in mind.

With an increase in expenditure on subsidies, interest charges and defence services, the revenue deficit will be rising further to Rs. 112,292 crores in 2003-04 (Budget) from Rs. 104,712 cores in the revised estimates of 2002-03 and Rs. 95,377 crores (Budget). As a consequence, the fiscal deficit also will be quite high at Rs. 153,637 crores as compared to Rs. 145,466 crores (Revised 2002-03) and Rs. 135,524 crores (Budget 2002-03).

The net borrowing will be sizable at Rs. 107,194 crores in 2003-04 (Budget) though slightly lower than the Rs. 112,865 crores in 2002-03 (revised). The latter was, of course, much higher than the Budget estimate of Rs. 95,859 crores. The slightly reduced borrowing through market loans is due to the expectation that the proceeds under the disinvestment programme will be higher at Rs. 13,200 crores against only Rs. 3,360 crores. The credits under others will, of course, be rising to Rs. 25,391 crores from Rs. 22,019 crores (revised) and Rs. 10,997 crores (Budget).

The borrowing programme in 2003-04 may not, of course, be difficult as conditions in the money market are quite comfortable and deposits of scheduled commercial banks have been rising at a faster rate than in earlier years with bulging forex reserves resulting from additional inflows on external account. The increase in remittances from expatriates and the likelihood of a current account surplus again will be ensuring the downtrend in interest rates on new loans.

In the current financial year also, the Finance Ministry did not experience any difficulty in raising the required resources even with the banking system expanding non-food credit substantially. The conditions in the money market were so comfortable that net borrowing could be increased by Rs. 17,006 crores to Rs. 112,865 crores in the revised estimates from Rs. 95,859 crores (Budget). Interest rates on many loans were lower than in earlier years and the advantage accruing to the Exchequer was on an average of 3 per cent.

This explains why even with a larger borrowing through loans, interest charges have declined slightly to Rs. 115,663 crores (Revised) from Rs. 117,390 crores (Budget). Private placement of loans up to March 14, 2003 accounted for only Rs. 36,175 crores against Rs. 25,679 crores, while net open market sales were significantly higher at Rs. 53,772 crores against Rs. 35,417 crores. There was an unsatisfied demand for government securities, as additions to bank deposits in the 12 months ended March 7, 2003 were as much as Rs. 186,362 crores against Rs. 138,925 crores. While incremental non-food credit accounted for Rs. 1,42,678 crores (Rs. 56,436 crores), food credit rose by Rs. 4,189 crores against Rs. 13,976 crores. Fresh investments could be increased to Rs. 106,097 crores against Rs. 70,143 crores.

Since there was no pre-emption of funds even with a larger borrowing and forex reserves were rising steadily, it was thought desirable by the Finance Ministry to repay loans from the World Bank and the Asian Development Bank to the extent of $2.97 billion and secure the required rupee resources through new loans.

There was a drop in forex reserves by $2.48 billion in the week ended February 28, 2003 to $72.88 billion as a result of this transaction. But the uptrend has been resumed. It is also significant that the increase in fiscal deficit (revised) is only due to the swap operation. Otherwise the deficit would have been even lower than the budget estimate.

The adjustments in external debt led to a corresponding increase in internal debt, though the Finance Ministry raised only Rs. 13,000 crores through 6.72 per cent Government Stock 2014 for Rs. 5,500 crores and 6.57 per cent Government Stock 2011 for Rs. 7,500 crores. The balance amount required for the repayments has been found from existing cash balances.

Against this background, the borrowing programme for 2003-04 may not create serious problems, especially as the amount involved will be even lower by Rs. 5,671 crores as compared to the revised estimates of 2002-03.

It will not be surprising if a fresh bid is made to reduce further the external debt with swap operations, as forex reserves may reach new high levels. However, it may be necessary to secure larger resources, if there is an unexpected increase in non-plan revenue expenditure and a shortfall in revenues as in 2002-03. It is pertinent to point out that net borrowing has been placed lower only because of the larger credits under the disinvestment programme and `others'.

The development in the international situation, as a result of the Iraq war, may not upset seriously the calculations of Mr. Jaswant Singh. The aberration in world prices for crude and petroleum products may not remain after two or three months. The inflationary pressures may not, therefore, get accentuated except for a short period and as indicated by Bimal Jalan, Governor of the Reserve Bank, the average inflation rate may be around 4 per cent. This prognosis may turn out correct if the agricultural sector stages a smart recovery.

If fresh developments in the coming weeks are favourable, as they are likely, the monetary authorities can even take a decision in respect of a further cut in the Bank Rate by half percentage point in two stages to 5.75 per cent.

The fundamentals of the economy are quite sound and if the developments in 2002-03 can be considered exceptional, it will be possible to sustain the downtrend in interest rates noticed in the past two years, as the uptrend in forex reserves may be sustained and the balance of payments position will remain comfortable.

It is, of course, hoped that there will be no shortfalls in tax revenues as encountered in earlier years. The Finance Ministry should intensify its efforts to increase tax revenues and achieve economies in non-plan revenue expenditure wherever feasible.

There may not be any disposition to adopt drastic measures for pruning expenditure on subsidies and the outgo under other heads when the budget estimates for 2004-05 is presented to Parliament.

It will have to be decided what measures should be adopted for bringing about a gradual reduction in the fiscal deficit with buoyancy in revenue receipts and meaningful reduction in non-plan revenue expenditure.

P. A. Seshan

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